Glenn Stevens is preparing for 2014

To again borrow the words of a famous Irish rugby captain, the Reserve Bank is getting in its retaliation first.

Today’s rate cut isn’t about last month’s retail sales or housing activity, but where the economy might be in 2014. And that’s why the rate cut is not unambiguously good news. One should always be careful about what you wish for.

The key phrase in governor Glenn Stevens’ brief statement was this: “Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected. As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.”

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So after a stupendous ride on the resources capex boom, the RBA would like to see other parts of the economy start to do more as capex starts to do proportionately less going into 2014.

As suggested yesterday, the fine judgement came down on the side of the engine needing some stoking now in an effort to build up a head of steam that will take effect considerably later.

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The balance was tipped by a softer Asian outlook: “Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.”

And it was made possible by the RBA believing inflation will remain in its target zone “for the next one or two years” with the carbon tax impact not a problem. Thus there is little immediate downside risk in loosening monetary policy.

But even while trimming the cash rate, Stevens was sounding a warning: “Moderate labour market conditions… and some continuing improvement in productivity performance will be needed to keep inflation low as the effects of the earlier exchange rate appreciation wane.”

In other words, the RBA might be pouring some more punch, but you wouldn’t want to expect a wild party.

The RBA is very careful with its choice of words, which is why you shouldn’t get your hopes up about lower rates significantly weakening the Australian dollar. Note that the inflation warning was about the effects of “the earlier exchange rate appreciation” waning, not about the exchange rate depreciating.

There is a considerable difference. The prices of traded goods fell as our dollar rose, but the anti-inflationary impact ceases when the dollar remains stable. If the exchange rate starts falling, then the impact becomes inflationary. This statement only suggests the Aussie will hold, not fall.

The fine judgement came down on the side of the engine needing some stoking now in an effort to build up a head of steam.

The pattern in this cycle of rate cuts has been for an immediate dip by the dollar, but the fall doesn’t last long.

The Aussie started the day at $US1.0365 and was at $US1.0310 shortly after the rate cut. The movement of half a cent might excite forex traders, but it makes little difference to the nation and, as previously suggested, the rate is as much about the other currency as it is about the Aussie.

The main game for us then is the China outlook, as it has been for a decade. The RBA remains measured in suggesting the uncertainty is about “near-term” prospects – the world’s second-biggest economy is still growing strongly on any absolute measure and remains on track to take the title of the world’s biggest in five years – but the mandarins here are likely to be preparing for the mandarins there announcing a growth rate stuck in the mid-7s for the end of the September quarter when it had been hoped that the June quarter’s 7.6 per cent would be the bottom for now.

Half a dozen years ago, economic growth starting with a 7 would have been a deep concern for China, but given the size of the economy now, 7-something is respectable indeed. Any of the other countries in the top 10 would be delirious if their growth came anywhere near that. And they couldn’t sustain it anyway.

It remains an interesting time for setting monetary policy, trying to fine tune what the economy might be like in early 2014, but it always is.